A game of billions

• South Africa
• Public debt, SAA, SOE, South Africa, South African Airways, State-Owned Enterprise
• September 24, 2020

In the world of corporate and public finances, numbers can quickly lose meaning. You probably think carefully about spending R500, but I’ll bet you often read about a number like R5bn without a moment’s thought given to the size of this number.

Let’s take a moment to explain how enormous this number actually is.

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Written out in full, R5bn is R5,000,000,000. That’s a lot of zeroes. If you earn 10% on that per year, you make R500,000,000, or R500m. That’s still a very large number with many zeroes.

Here’s another angle…

Let’s assume you’ve dedicated your life to building a banger of a company that makes R10m per year net profit. That’s a great business and you’ll already be wealthy from the annual dividends, but an offer comes through the door for R50m (a decent Price / Earnings ratio of 5x) and you take it.

Before we even consider the chunk payable to SARS as Capital Gains Tax, R50m is 1% of R50bn. Just 1%. That’s it.

R10.5bn shouldn’t be ignored

The South African government keeps changing its mind about whether to provide R10.5bn to the SAA Business Rescue Practitioners to enable SAA to keep burning cash.

We just proved above that R5bn is a massive number. R10.5bn is more than double that.

This number is higher than the R10.1bn market cap of the Johannesburg Stock Exchange Limited (the company itself, not the companies on the exchange). We have one of the best stock exchanges in the world and the company operating it is worth less than the amount the government is casually throwing around as BRIDGING finance for SAA which has practically zero chance of being repaid.

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None of this is sending a good signal to the world

Unfortunately for South Africa, capital markets are driven by sentiment. Historical numbers are exactly that – historical. People use them to help make decisions, but forward-looking views are greatly informed by general sentiment.

Global sentiment towards the South African government is extremely poor. We are viewed as continuously making strange decisions and shooting ourselves in the foot. The ongoing SAA debacle is just another example of this.

Negative sentiment towards South Africa has a direct effect on our cost of borrowing as a country. As that cost increases, we spend more on interest and less on investing in our country. It’s a vicious cycle.

Following a guy like Magnus Heystek on Twitter is as depressing as watching reruns of Allan Donald dropping the bat in 1999, but unfortunately so-called Dr Doom is right about a lot of things. Our economy is in a huge amount of trouble and whilst there are some green shoots in government to do something about it, nowhere near enough change is coming through.

The concept of “in the public interest” needs a relook

State-owned enterprises (SOEs) exist because they are of national importance and in the public interest. For example, back in the day, the post office needed to exist for the country to function properly. Even if it made a loss, it was a necessary evil for any country.

A national airline creates international prestige as a tourism destination. It also connects towns that may not otherwise be economically viable. SAA was critical in enabling travel between South Africa and a number of African destinations, assisting in driving trade between countries as executives could travel to these places to close deals.

The real question now is whether it is “in the public interest” or “of national importance” to drop another R10.5bn into this airline. The challenge is that there are multiple knock-on effects of a bankruptcy of SAA, since the government has guaranteed huge sums of money to local banks and other creditors.

A default by a state-owned entity is also problematic because there may be cross-default clauses in debt packages for other SOEs that aren’t public knowledge.

I’ve written this article on Heritage Day. SAA is part of our country’s heritage, but that isn’t enough to justify ongoing financial destruction at a time when we cannot afford any further missteps with our public funds.

It’s time to sell the brand to a private operator and reach a settlement plan with the creditors. Otherwise, the cash burn will just carry on forever. When are we going to draw a line in the sand?

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